IRS PROVIDES PROCEDURE FOR CHANGING METHODS OF ACCOUNTING FOR CAPITALIZED INTEREST COSTS.

Rev. Proc. 95-19

                               CONTENTS

.01 This revenue procedure provides the exclusive procedure for taxpayers to obtain consent to change certain methods of accounting for interest costs subject to section 263A(f) of the Internal Revenue Code to methods required or permitted by sections 1.263A-8 through 1.263A-15 of the Income Tax Regulations. A taxpayer complying with all the applicable provisions of this revenue procedure will be deemed to have obtained the consent of the Commissioner of Internal Revenue to change its method of accounting under section 446(e) for its first taxable year beginning on or after January 1, 1995, or, if the taxpayer elects early application of the regulations, for its first taxable year beginning on or after January 1, 1994.

.02 This revenue procedure also modifies the terms and conditions applicable under Rev. Proc. 92-20, 1992-1 C.B. 685, for applications for changes in methods of accounting for interest costs subject to section 263A(f) filed for a taxpayer's first or second taxable year beginning on or after January 1, 1996.

SECTION 2. BACKGROUND

.01 Section 263A(f) generally requires a taxpayer to capitalize production period interest.

.02 Sections 1.263A-8 through 1.263A-15, published as T.D. 8584 in the Federal Register on December 29, 1994, provide rules for capitalizing interest pursuant to section 263A(f). Section 1.263A- 15(a) provides that the rules of sections 1.263A-8 through 1.263A-15 generally apply to interest incurred in taxable years beginning on or after January 1, 1995. However, in the case of property that is inventory in the hands of the taxpayer, these sections are effective for taxable years beginning on or after January 1, 1995. Section 1.263A-15(a) provides that a taxpayer must make the changes in methods of accounting necessary as a result of the rules in sections 1.263A-8 through 1.263A-15 under administrative procedures prescribed by the Commissioner. In addition, section 1.263A-15(a) provides that taxpayers may elect early application of the regulations for taxable years beginning on or after January 1, 1994, in the case of inventory and to interest incurred in taxable years beginning on or after January 1, 1994, in the case of property that is not inventory in the hands of the taxpayer.

.03 Section 446(e) and section 1.446-1(e)(2)(i) state that, except as otherwise expressly provided, a taxpayer must obtain the consent of the Commissioner to change a method of accounting for federal income tax purposes.

.04 Section 1.446-1(e)(3)(i) requires that in order to obtain this consent, a Form 3115, Application for Change in Accounting Method, generally must be filed within 180 days after the beginning of the taxable year in which the proposed change is to be made.

.05 Section 1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions deemed necessary to permit a taxpayer to obtain consent to change its method of accounting in accordance with section 446(e).

.06 Section 481(a) requires that those adjustments necessary to prevent amounts from being duplicated or omitted must be taken into account when the taxpayer's taxable income is computed under a method of accounting different from the method used to compute taxable income for the preceding taxable year.

.07 Section 481(c) and section 1.481-5 provide that the adjustments required by section 481(a) must be taken into account in determining taxable income in the manner and subject to the conditions agreed to by the Commissioner and the taxpayer.

.08 Rev. Proc. 92-20 provides the general procedures under section 1.446-1(e) for obtaining the consent of the Commissioner to change a method of accounting for federal income tax purposes. Section 2.04 of Rev. Proc. 92-20 provides that, unless other published guidance provides terms and conditions that must be used in making a specific type of accounting method change, a change in method of accounting will be made pursuant to the terms and conditions provided in Rev. Proc. 92-20.

SECTION 3. SCOPE

.01 APPLICATION TO CHANGES IN METHOD OF ACCOUNTING FOR INTEREST COSTS SUBJECT TO SECTION 263A(f) FOR TAXABLE YEARS BEGINNING IN 1994 AND 1995. Except as provided in section 3.02, this revenue procedure applies to a change in method of accounting for interest costs subject to section 263A(f) for the taxpayer's first taxable year beginning on or after January 1, 1995, to a method required or permitted by sections 1.263A-8 through 1.263A-15. If the taxpayer elects early application of the regulations, this revenue procedure applies to such a change in method of accounting for the taxpayer's first taxable year beginning on or after January 1, 1994. This revenue procedure applies to any such change in method of accounting for interest costs, regardless of whether the taxpayer complied with the statute and other administrative pronouncements interpreting section 263A(f) prior to the publication of sections 1.263A-8 through 1.263A-15.

.02 SPECIAL RULES FOR TAXPAYERS THAT ARE THE SUBJECT OF A PENDING CRIMINAL INVESTIGATION OR PROCEEDING. A taxpayer that is the subject of a pending criminal investigation or proceeding concerning (1) any issue directly or indirectly related to the taxpayer's federal tax liability for any taxable year, or (2) the possibility of false or fraudulent statements made by the taxpayer regarding any issue related to its federal tax liability for any taxable year, must request the written consent of Criminal Investigation to change its method of accounting for interest subject to section 263A(f) to a method required by sections 1.263A-8 through 1.263A-15. Unless Criminal Investigation withholds such consent, the taxpayer must change its method of accounting in accordance with this revenue procedure and attach the written consent from Criminal Investigation to its Form 3115. Changes in method of accounting required to comply with sections 1.263A-8 through 1.263A-15, to which Criminal Investigation does not consent, must be made immediately after the termination of the criminal investigation or proceeding, and in accordance with this revenue procedure.

.03 APPLICATION TO CHANGES IN METHOD OF ACCOUNTING FOR INTEREST COSTS SUBJECT TO SECTION 263A(f) FOR TAXABLE YEARS BEGINNING AFTER 1995. Section 7 of this revenue procedure modifies Rev. Proc. 92-20 with respect to applications to make a change in method of accounting for interest costs subject to section 263A(f) for a taxpayer's first or second taxable year beginning on or after January 1, 1996.

SECTION 4. APPLICATION

.01 CONSENT. In accordance with section 1.446-1(e)(3)(ii), the requirement to file an application on Form 3115 within the 180-day period is waived for any application for change in method of accounting filed pursuant to this revenue procedure. In addition, under section 1.446-1(e)(2)(i), the consent of the Commissioner is hereby granted to any taxpayer within the scope of this revenue procedure to change its method of accounting for interest costs to a method required or permitted by sections 1.263A-8 through 1.263A-15. This consent is granted for the taxpayer's first taxable year beginning on or after January 1, 1995, or, at the taxpayer's election, the taxpayer's first taxable year beginning on or after January 1, 1994. This consent is conditioned, however, on the taxpayer filing a current Form 3115 in the manner described in section 4.02 or 4.03 of this revenue procedure and otherwise complying with the provisions of this revenue procedure.

.02 GENERAL FILING PROCEDURE. A taxpayer applying for a change in method of accounting pursuant to this revenue procedure must complete and file a current Form 3115 in duplicate. The original must be attached to the taxpayer's timely filed (including extensions) original federal income tax return for the year of change. If, however, the taxpayer files its original return for the year of change on or before [insert date 60 days after publication of the revenue procedure], it may change its method of accounting by filing an amended return and attached Form 3115 for the year of change on or before [insert date 120 days after the publication of this revenue procedure]. In all cases a copy of the Form 3115 must be filed with the National Office and addressed to the Commissioner of Internal Revenue, Attention: Office of Assistant Chief Counsel (Income Tax & Accounting), CC:DOM:IT&A, P.O. Box 7604, Benjamin Franklin Station, Washington, D.C. 20044, no later than when the original of the Form 3115 is filed with the federal income tax return. No user fee is required for an application filed under this section 4.02, and an application filed under this section 4.02 will not be acknowledged.

.03 SPECIAL FILING PROCEDURE FOR TAXPAYERS ELECTING EARLY APPLICATION OF THE REGULATIONS. In lieu of filing separate Forms 3115 for changes in methods of accounting for interest costs under this revenue procedure and changes in methods of accounting for other section 263A costs under Rev. Proc. 94-49, 1994-30 I.R.B. 31, a taxpayer electing early application of sections 1.263A-8 through 1.263A-15 may elect to file only one Form 3115 (and compute only one section 481(a) adjustment) for all such section 263A changes for its first taxable year beginning on or after January 1, 1994. A taxpayer may elect to file one such Form 3115, however, only if the taxpayer can satisfy all the requirements of both this revenue procedure and Rev. Proc. 94-49 with respect to the combined Form 3115.

.04 SECTION 481(a) ADJUSTMENT FOR INVENTORY ASSETS. For inventory assets, the section 481(a) adjustment generally must be taken into account in computing taxable income in the manner provided in section 4.05 of this revenue procedure. A change in method of accounting under this revenue procedure shall be treated as a voluntary change in method of accounting that is initiated by the taxpayer, and, therefore, the section 481(a) adjustment is not restricted to post-1953 items. The section 481(a) adjustment also must include any amount necessary to reflect application to the taxpayer of related party rules for interest as set forth in sections 1.263A-8 through 1.263A-15 and Notice 88-99, 1988-2 C.B. 422.

.05 SECTION 481(a) ADJUSTMENT PERIOD. Beginning with the year of change, a taxpayer changing its method of accounting for interest costs pursuant to this revenue procedure generally must take any applicable section 481(a) adjustment into account ratably over 4 taxable years in computing its taxable income regardless of whether the adjustment is positive or negative. See sections 4.06 and 4.12 of this revenue procedure for exceptions to this general rule.

.06 DE MINIMIS RULE. If the section 481(a) adjustment is less than $25,000, the taxpayer may elect to take the adjustment into account in the year of change instead of over the adjustment period otherwise prescribed by section 4.05 of this revenue procedure. A taxpayer that makes this election must attach to its original Form 3115 a statement indicating that it is electing the de minimis rule pursuant to section 4.06 of this revenue procedure.

.07 YEAR OF CHANGE. The year of change for a change in method of accounting for interest costs subject to section 263A(f) is the taxpayer's first taxable year beginning on or after January 1, 1995, or, at the taxpayer's election, the taxpayer's first taxable year beginning on or after January 1, 1994.

.08 NON-INVENTORY PROPERTY. Because sections 1.263A-8 through 1.263A-15 apply in the case of non-inventory property only to interest costs incurred in taxable years beginning on or after January 1, 1995, or, at the election of the taxpayer, taxable years beginning on or after January 1, 1994, no section 481(a) adjustment is necessary to effect section 263A(f) changes in methods of accounting for this property (i.e., the changes generally are effected on a cut-off basis). To qualify, however, for the protection from examination changes provided in section 5 of this revenue procedure, a taxpayer must compute and properly take into account any section 481(a) adjustment that results from a change from a method of accounting that was not in compliance with the requirements of section 263A(f) and administrative pronouncements regarding the capitalization of interest (including any related party capitalization) in effect prior to the taxpayer's year of change. Thus, such a taxpayer must revalue its non-inventory property as of the beginning of its year of change, and the section 481(a) adjustment will equal the difference between the adjusted basis of the property as originally valued and the adjusted basis of the property as revalued. In revaluing the non-inventory property, however, the only interest costs that must be taken into account by reason of section 263A(f) are those interest costs incurred after December 31, 1986, in taxable years ending after that date. Taxpayers filing a consolidated federal income tax return that desire the protection provided in section 5 of this revenue procedure must also revalue deferred gains or losses arising from deferred intercompany transactions in a manner consistent with the principles applicable to inventory property under sections 1.263A-7T(e)(1)(i), (ii), and (iv).

.09 APPLICATION OF SECTION 1.263A-7T(e). Section 1.263A-7T(e) provides procedures that a taxpayer must use to revalue the items or costs included in its inventory for the first taxable year it is subject to section 263A. The following provisions of section 1.263A- 7T(e) apply to a change in method of accounting made pursuant to this revenue procedure:

(1) section 1.263A-7T(e)(1), which provides the general rule that a taxpayer must revalue the items or costs included in its beginning inventory and also requires a taxpayer filing a consolidated federal income tax return to revalue deferred gains or losses resulting from deferred intercompany transactions;

(2) section 1.263A-7T(e)(6), which provides procedures for a taxpayer to use in revaluing its inventory, including a facts and circumstances revaluation method, a weighted average revaluation method for a taxpayer using either the first-in, first-out (FIFO) or the specific goods last-in, first-out (LIFO) inventory method, and a 3-year average revaluation method for a taxpayer using the dollar-value LIFO method (see section 4.10 of this revenue procedure for rules regarding the establishment of a new base year);

(3) sections 1.263A-7T(e)(7), (8), and (9), which provide the procedures that a taxpayer using either the weighted average revaluation method or the 3-year average revaluation method may use to make adjustments to its inventory costs from prior years to prevent the capitalization of costs not incurred in earlier years; and

(4) sections 1.263A-7T(e)(11)(iii) and (iv), which provide the definition of a change in method of accounting required to be made under section 263A, and the ordering rules when there are changes in methods of accounting other than those required by section 263A.

.10 NEW BASE YEAR. A taxpayer that revalues its LIFO layers is generally not permitted to establish a new base year if it changes its method of accounting for interest costs pursuant to this revenue procedure. However, a dollar-value LIFO taxpayer using the 3-year average revaluation method, and not using the simplified inventory method of section 1.263A-9(g)(3), must establish a new base year if it changes its method of accounting for interest costs pursuant to this revenue procedure.

.11 APPLICABILITY OF NOTICE 88-23. Notice 88-23, 1988-1 C.B. 490, is applicable to a change in method of accounting made pursuant to this revenue procedure. Notice 88-23 provides that a taxpayer changing its method of accounting to comply with section 263A for its first taxable year beginning after December 31, 1986, and also desiring to discontinue its use of the LIFO method of accounting for inventories in the same taxable year, may choose to change from the LIFO method before it makes the change in method of accounting required by section 263A.

.12 APPLICABILITY OF REV. PROC. 92-20. Except as otherwise provided in this revenue procedure, the following definitions and provisions of Rev. Proc. 92-20 apply to a change in method of accounting made pursuant to this revenue procedure:

(1) sections 3.01 through 3.04, which provide definitions for the following terms: "taxpayer," "under examination," "year of change," and "filed";

(2) section 8.01(2), which modifies the adjustment period if 90 percent or more of the section 481(a) adjustment is attributable to the taxable year immediately preceding the year of change;

(3) section 8.01(4), which generally requires cooperatives to take the entire section 481(a) adjustment into account in the year of change;

(4) section 8.02, which provides that a short taxable year is treated as a separate taxable year; and

(5) section 8.03, which provides situations where the section 481(a) adjustment period that is computed under section 4.05 of this revenue procedure will be accelerated.

.13 EXCLUSIVE PROCEDURE. For changes in method of accounting to which this revenue procedure applies, this is the exclusive procedure available to a taxpayer for obtaining the Commissioner's consent to change its method of accounting for interest costs subject to section 263A(f) to a method required or permitted by sections 1.263A-8 through 1.263A-15.

.14 ADDITIONAL PROCEDURAL REQUIREMENTS.

(1) AGREEMENT TO TERMS. In addition to providing all the information required on the Form 3115, a taxpayer also must attach to the Form 3115 a written statement providing that it agrees to all the terms and conditions of this revenue procedure.

(2) LABEL. In order to assist in the processing of changes in methods of accounting under this revenue procedure, reference to this revenue procedure must be made a part of the Form 3115 by either typing or legibly printing the following statement at the top of page 1 of each Form 3115: "FILED UNDER REV. PROC. 95-19."

(3) SIGNATURE. The Form 3115 and the statement described in section 4.14(1) of this revenue procedure must be signed by or on behalf of the taxpayer requesting the change by an individual with the authority to bind the taxpayer in such matters. For example, an officer must sign on behalf of a corporation, a general partner on behalf of a partnership, a trustee on behalf of a trust, or an individual on behalf of a sole proprietorship. See the signature requirements in the General Instructions for Form 3115. If the taxpayer is a member of a consolidated group, a Form 3115 submitted on behalf of the taxpayer must be signed by a duly authorized officer of the common parent. See section 1.1502-77.

(4) AUTHORIZED REPRESENTATIVE. If an agent is authorized to represent the taxpayer before the Service, to receive the original or a copy of correspondence concerning the request, or to perform any other act(s) regarding the Form 3115 on behalf of the taxpayer, a power of attorney reflecting such authorization(s) must be attached to the Form 3115. A taxpayer's representative without a power of attorney to represent the taxpayer will not be given any information regarding the Form 3115.

SECTION 5. PROTECTION FOR TAXABLE YEARS PRIOR TO THE YEAR OF CHANGE.

.01 GENERAL RULE. Except as provided in section 5.02 or 5.03, if a taxpayer timely files a completed Form 3115 to change its method of accounting for costs subject to section 263A(f) in the manner described in this revenue procedure and otherwise complies with the provisions of this revenue procedure, the district director may not propose that the taxpayer change the same method of accounting as that changed by the taxpayer under this revenue procedure for a year prior to the year of change prescribed in this revenue procedure. The district director, however, will verify the amount of the section 481(a) adjustment and the section 481(a) adjustment period, and otherwise determine whether the taxpayer has fully complied with the provisions of this revenue procedure.

.02 TAXPAYERS UNDER EXAMINATION.

(1) WINDOW PERIODS. A taxpayer that is under examination receives the protection from examination changes described in section 5.01 only with respect to:

(a) methods of accounting to which the taxpayer would otherwise be eligible to change under section 6.02(1) (90- day window), 6.03(1) (120-day window), 6.04(1) (30-day window), or 6.05(1) (90-day post-affiliation window) of Rev. Proc. 92-20, provided the taxpayer complies with section 5.02(3) of this revenue procedure; and

(b) section 263A(f) issues that are not under consideration on [Insert date of publication of revenue procedure], provided the taxpayer provides a Form 3115 to the examining agent(s) on or before the close of a window period that expires on [Insert date 90 days after publication of revenue procedure] and otherwise complies with section 5.02(3) of this revenue procedure.

(2) ISSUE UNDER CONSIDERATION. For purposes of section 5.02(1) of this revenue procedure, a section 263A(f) issue is under consideration for all years prior to the year of change if the taxpayer has received written notification from the examining agent(s) (e.g., by examination plan, information document request, notification of proposed adjustments or income tax examination changes) specifically citing the section 263A(f) method or sub-method of accounting as an issue under consideration for the taxable year(s) under examination.

(3) REQUIREMENT TO PROVIDE EXAMINING AGENT(S) WITH A COPY OF THE FORM 3115. A taxpayer that is under examination must provide the examining agent(s) with a copy of the Form 3115 for the year of the change indicating the specific methods of accounting that it is changing under this revenue procedure. The Form 3115 generally must be provided to the examining agent(s) on or before the last day of the applicable window period under section 5.02(1) of this revenue procedure. Notwithstanding the above, however, the Form 3115 must be provided to the examining agent(s) no later than the date on which it is filed with the National Office under section 4.02 of this revenue procedure. A Form 3115 provided to the examining agent(s) on or before the last day of an applicable window period need not contain a section 481(a) adjustment, provided a copy of the completed Form 3115 (with the section 481(a) adjustment) is provided to the examining agent(s) at the same time it is filed with the National Office under section 4.02 of this revenue procedure.

(4) LABEL. To assist in the processing of changes in methods of accounting filed under a window period of this revenue procedure, reference to the applicable window period must be made a part of the Form 3115 by either typing or legibly printing the following statement at the top of each Form 3115: "FILED UNDER section 5.02 of REV. PROC. 95-19."

.03 TAXPAYERS THAT HAVE A SECTION 263A(f) ISSUE BEFORE APPEALS OR A FEDERAL COURT. A taxpayer does not receive the protection from examination changes described in section 5.01 with respect to any section 263A(f) issue that is before:

(1) an appeals office of the Service with respect to an examination of the taxpayer's federal income tax return(s) for any taxable year; or

(2) a federal court.

SECTION 6. FAILURE TO COMPLY WITH CONDITIONS

If a taxpayer to which this revenue procedure applies changes its method of accounting for interest costs subject to section 263A(f) without complying with all the conditions of this revenue procedure, the taxpayer will be deemed to have initiated the change in method of accounting without obtaining the consent of the Commissioner as required under section 446(e).

SECTION 7. MODIFICATION OF REV. PROC. 92-20 TERMS AND CONDITIONS

.01 MODIFICATION OF REV. PROC. 92-20 YEAR OF CHANGE FOR CHANGES NOT MADE UNDER THIS REVENUE PROCEDURE. For all applications for changes in method of accounting for interest costs subject to section 263A(f) filed under Rev. Proc. 92-20, or any other applicable Code, regulations, or administrative provisions pertaining to the change, for the taxpayer's first or second taxable year beginning on or after January 1, 1996, the Service reserves the discretion to treat the applications as applications to change the taxpayer's method of accounting for its first taxable year beginning on or after January 1, 1995. Consistent with any required 1995 year of change, a taxpayer may be required to file amended returns for its 1995 and any subsequent taxable years as a condition for granting the change in method of accounting filed for the taxpayer's first or second taxable year beginning on or after January 1, 1996. It is anticipated that the Service will exercise its discretion to require an earlier year of change when a taxpayer applies to change its method of accounting in order to comply with sections 1.263A-8 through 1.263A-15 and not when a taxpayer is merely applying to change from one permissible method to another permissible method.

.02 MODIFICATION OF REV. PROC. 92-20 SECTION 481(a) ADJUSTMENT PERIOD FOR CHANGES NOT MADE UNDER THIS REVENUE PROCEDURE. For all applications for changes in method of accounting for interest costs subject to section 263A(f) filed under Rev. Proc. 92-20, or any other applicable Code, regulations, or administrative provisions pertaining to the change, for a taxpayer's first or second taxable year beginning on or after January 1, 1996, the section 481(a) adjustment, whether positive or negative, must be taken into account in accordance with the section 481(a) adjustment period prescribed in this revenue procedure (generally 4 taxable years).

SECTION 8. INQUIRIES

Inquiries regarding this revenue procedure may be addressed to the Commissioner of Internal Revenue, Attention: Office of Assistant Chief Counsel (Income Tax and Accounting) CC:DOM:IT&A, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.

SECTION 9. EFFECTIVE DATE

The provisions of this revenue procedure are effective [insert date of publication of this rev. proc.], the date of its publication. The Service will return any Form 3115 that is filed with the National Office pursuant to the Code, regulations, or administrative guidance other than this revenue procedure if the change in method of accounting is within the scope of this revenue procedure. Taxpayers that have timely filed a Form 3115 with the National Office prior to the effective date of this revenue procedure must use the automatic provisions of this revenue procedure and will be so notified to this effect by the National Office.

SECTION 10. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 92-20 is modified.

DRAFTING INFORMATION

The principal author of this revenue procedure is Jan Skelton of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Ms. Skelton at (202) 622-4970 (not a toll-free call).